Commencing 1 January 2021, subject to the passing of legislation, Australia’s insolvency framework will change, with new processes introduced to reduce complexity, time and costs for small businesses with liabilities under $1 million. The reforms should better serve those businesses, their creditors and their employees.

For example, under current legislation, external administration costs are taken from the assets of the distressed company and can be greater than its value. This places pressure on the company, potentially forcing it into liquidation after voluntary administration and leaving less returns for the creditors and employees.

Driven in large by the impacts to business that have arisen from the coronavirus pandemic, the Australian Government believes the reforms will support Australia to emerge from the pandemic with a stronger, more resilient and competitive economy.

Summary of the reforms

If legislated, the reforms will:

  • Formalise a debt restructuring process for eligible companies
  • Extend temporary relief for eligible companies intending to undertake a formal debt restructuring process
  • Simplify the liquidation process for eligible companies in a creditors’ voluntary wind up
  • Refine the requirements for registration as a liquidator
  • Increase the use of electronic debt documents and electronic signatures in an external administration.

You can access the draft legislation on the Federal Treasury website here.

Public consultation on the exposure draft legislation has now closed and subject to passing parliament, the reforms will come into place on 1 January 2021. We will provide updates as they occur.